Auctions are defined to be market mechanisms in which several potential buyers or sellers negotiate for the transaction of some item or plurality of items (e.g., “goods” or “properties” or “services”) by competitive bidding. Auctions that are conducted or implemented with the assistance of computer-based technology are called electronic auctions or computer implemented auctions. For example, an electronic auction may use computers at the central market system to perform computations associated with the allocation of goods, and electronic auctions may use computer networks to communicate bids and other information between buyers, sellers, and the central market system.
A regular auction is defined as an auction in which there is just one prospective seller who initiates the auction and several prospective buyers who place bids, while a reverse auction is defined as an auction in which there is just one prospective buyer who initiates the auction and several prospective sellers who place bids. Auctions can be dynamic (e.g., the classical English auction) or static (e.g., the second-price auction and its generalizations). Optimal auction mechanisms are those that produce economically optimal allocations, e.g., those which maximize the total gains from trade. Generalized second-price auctions are optimal in a broad range of cases.
Double auctions are defined as auctions with multiple buyers and multiple sellers. A regular double auction is defined as a double auction in which the sellers initiate the process by revealing their intention to sell, after which all the participants (buyers and sellers) submit their bids to a central market system; a reverse double auction is defined to be a double auction in which the buyers initiate the process by expressing their willingness to buy, after which all the participants submit their bids. The bids submitted by sellers are commonly called ‘asks’.
Compared to the more common auctions, in which there is just one seller and multiple buyers or just one buyer and multiple sellers, very little is known about double auctions, where there are both multiple buyers and multiple sellers. Even in simple cases, full efficiency is precluded unless the market house is allowed to run budget deficits. Most work on double auctions assumes that the good being traded is homogeneous, i.e., consisting of multiple units of the same type of good, and that buyers and sellers are interested in trading at most one unit of the good.
An economic mechanism, either auction or double auction mechanism, is direct if the best strategy for all participants is to reveal their own true preferences and information to the system. A mechanism is efficient if it produces an economically efficient allocation, i.e., one which exhausts all the potential gains from trade. The gains from trade are measured by the difference between the total monetary value of the final allocation (i.e., the sum of monetary values of all the goods for the participants who receive them in the final allocation) minus the total monetary value of the initial allocation (i.e., the sum of monetary values of all the goods for the participants who hold them in the initial allocation). A mechanism is asymptotically efficient if it approaches full efficiency as the number of buyers and sellers becomes large. A mechanism is individually rational if the buyers and sellers are left free to decide whether to participate or not. A mechanism is budget-balanced if it never incurs losses or gains.
Current double auction mechanisms determine both matches and transaction prices. The prices can be the same for both buyers and sellers, or different. If the prices are different, the market house incurs profits or losses. In current double auction mechanisms the prices faced by buyers and sellers are always final. Furthermore, the prices are always revealed symmetrically to all buyers and sellers, and there is no role for asymmetric price revelation. Furthermore, in existing double auction mechanisms there is no role for bargaining. Due to the above limitations in current double auction mechanisms, it is generally impossible to achieve an efficient allocation of the items which exhausts all the gains from trade among the market participants in any current electronic double auction mechanism which is individually rational and budget-balanced. Accordingly, there is a need for a novel family of electronic double auction mechanisms that overcome the above limitations.